Oil prices continue to decline, and their YTD performance is now negative. What’s more, the futures curve is in backwardation, meaning that demand is weaker than expected. At its upcoming meeting on 4 December, Opec will have to make a point of reassuring the markets about supply until the current economic downturn is behind us.
The economic news coming out of the eurozone has been surprisingly positive in recent months. Purchasing managers’ indexes and Germany’s IFO indicator have all done better than expected. But the economic climate is likely to remain tough for some time, since monetary policy tightening and higher oil prices tend to have a delayed impact on the economy.
Black Friday sales in the US drove retail foot traffic up 3%. Online sales recorded similar growth, a sign that the economic environment is still buoyant for US consumers. However, retailers offered massive discounts to try and clear their overstock, and this will almost certainly weigh on their earnings.
Has the bear market ended for bonds ?
There are, at last, some signs of disinflation around the world. They were first seen in the US and could soon come to Europe as well. Energy prices were the first to ease – they have been falling everywhere since reaching sometimes dizzying heights over the spring and summer as a result of the war in Ukraine. Natural gas prices are also now heading downwards in Europe. The autumn is mild, and European countries have been replenishing their gas reserves, so prices have fallen quite sharply in recent weeks, even though Russian supplies have been all but cut off. Basic food prices are following the same trend, and fears of a global food crisis are also fading. On top of that, shipping costs are now back at pre-pandemic levels, having risen sharply when the global economy reopened and the war broke out in Ukraine. It is therefore very likely that upcoming consumer price data will show that inflation is most definitely easing in the US and likely to peak at the end of 2022 in Europe. This should prompt central banks to show a little more restraint in the monetary policy tightening under way since the start of the year. An easing of inflationary pressure is excellent news for bond investors. Inflation is never good for bonds because it tends to reduce the real value of future coupon payments and redemptions at maturity. So the worst is probably now over for the fixed-income market. This comes as a major relief, since 2022 looks set to be one of the worst in nearly 50 years, with double-digit declines in most of the world’s major bond markets. Investors are not used to such hefty losses, especially in a year when stock markets have also recorded sharp declines. But the next few years look set to be much better for bonds. Yields are now back at attractive levels for portfolios, and capital should grow if global inflation continues to slow. Rather than giving up on bonds, we are now bullish on this asset class.
The long-awaited pivot in zero-COVID restrictions
Chinese markets have been on a rollercoaster ride in recent weeks, starting with the reaction to the Party Congress at the end of October, when investors – particularly in offshore markets – capitulated in response to President Xi’s consolidation of power.
However, this bout of weakness didn’t last long. Stock markets bounced back on the first signs that COVID restrictions would be lifted after nearly three years. The recent easing of some restrictions, including a reduction in the quarantine period for inbound travellers, has brought some hope that the Chinese economy will soon reopen.
Additional measures to shore up the country’s property sector and the further cut to the reserve requirement ratio announced last week have also boosted investor sentiment, with the Hong Kong Stock Exchange’s property and technology index gaining around 20% since the beginning of the month.
This past weekend, the number of COVID cases hit a record 40,000 and, unusually, there were protests in several Chinese cities. These recent developments will present some hard choices to the Chinese government, although we think the country is likely to keep moving towards reopening. In fact, current COVID numbers and public pressure could actually prompt the government to speed up this process.
At some point, China will have to learn to live with COVID, like the rest of the world has. And while the Chinese authorities are unlikely to officially withdraw their zero-COVID policy, they may need to informally ease restrictions to avoid further social unrest and economic damage. We will focus on facts rather than rhetoric in order to gauge how likely and how fast any change in policy might be in the coming months.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
